This book details one of this generation's finest mathematical minds offers "obvious" observations he calls his "Ten Heresies of Finance."
Benoit Mandelbrot is known for making mathematical sense of facts everybody accepts but that geometers never assimilated. Clouds are not round. Mountains are not cones. Coastlines are not smooth. Add another: financial markets are not the safe bet your broker claims. In his first general audience book, Mandelbrot, with co-author Richard L. Hudson, reveal today's assumptions about the behavior of markets simply do not work.
"What passes for orthodoxy in economics and finance," the authors conclude, "proves on closer examination to be shaky business."
Among the book's observations:
1. Markets are turbulent. After spending a lifetime studying wind and ocean currents, he applies his multi-fractal math to analyze financial markets. "The tell-tale traces of turbulence are plainly there, in the price charts," he writes. The bell curve does not capture its changes.
2. Markets are inherently risky. Turbulence is dangerous. Market swings are wild and sudden. They are difficult to predict, more difficult to hedge and even more difficult from which to profit.
3. Marketing timing matters. Big gains and losses are concentrated into small time periods. News events such as earnings or economic announcements drive stock market prices.
4. Prices leap suddenly. This adds to risk. News announcements compel investors to act simultaneously and instantaneously.
Using his fractal tools, Mandelbrot describes how financial markets work. He describes the volatile, dangerous and in a unique way, strangely beautiful properties that for which few financial experts account.
This book is a must read for any serious investor. By pin-pointing flaws in accepted market wisdom, it provides a platform for a serious re-consideration of finance.
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